Wednesday, April 11, 2012

One of the biggest challenges that retirees face is inflation. Inflation decreases the purchasing power of the dollar every year. Over the past decade, inflation has averaged 2.40% per year, which has been slightly below the long-term average of 3% annually. Even if inflation were to continue to remain around 3% for the next few decades, this would affect the standard of living of retired investors over time. At a 3% annual inflation rate, the purchasing power of your income would be decreased by half in 24 years. As a result, investors relying on fixed income such as US Treasury bonds, would be faced with an income source which purchases less each year. In addition, given the low current yields on US Treasuries, investors these days have few options to invest for income besides dividend stocks.

A portfolio of carefully selected dividend stocks could provide investors with regular recurring dividend payments which have the potential to grow over time. Many investors tend to forget that dividend stocks represent partial ownership of real businesses. As inflation increases prices for goods and services, companies with strong pricing power tend to pass on price increases to consumers thus preserving and even increasing profits. Companies that tend to have strong pricing power, tend to have strong brand names and quality products which consumers desire and are willing to pay a premium price for. Consumers who prefer the taste of Pepsi will pay for the brand name product rather than generic cola or Coca-Cola and vice versa for consumers who like Coca Cola products. For example, I was able to purchase a 24 oz bottle of Coca Cola in 2003 for $1 at Wal-Mart, whereas today I would have to pay at least $1.50 today.

Another important factor when selecting companies for one’s income portfolio is whether the company has a history of consistent dividend increases that exceeds one decade. A company that generates so much in excess cash flows that manages to grow the business, while distributing higher amounts to shareholders in the form of dividends and share buybacks is a must hold for retirees who are living off dividends.

Five dividend stocks with strong brand names which have provided a rising stream of their shareholders for generations include:

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverages worldwide. The company has raised dividends for 50 years in a row. Over the past decade, the company has managed to boost distributions by 10.10% per year, handily beating the 2.40% annual inflation rate during this period. Yield: 2.80% (analysis)

PepsiCo, Inc. (PEP) engages in the manufacture, marketing, and sale of foods, snacks, and carbonated and non-carbonated beverages worldwide. The company has raised dividends for 40 years in a row. Over the past decade, the company has managed to boost distributions by 13.30% per year, handily beating the 2.40% annual inflation rate during this period. Yield: 3.10% (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company has raised dividends for 38 years in a row. Over the past decade, the company has managed to boost distributions by 17.90% per year, handily beating the 2.40% annual inflation rate during this period. Yield: 2.60% (analysis)

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company has raised dividends for 49 years in a row. Over the past decade, the company has managed to boost distributions by 12.40% per year, handily beating the 2.40% annual inflation rate during this period. Yield: 3.50% (analysis)

The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. The company has raised dividends for 55 years in a row. Over the past decade, the company has managed to boost distributions by 10.90% per year, handily beating the 2.40% annual inflation rate during this period.Yield: 3.10% (analysis)

Unilever PLC (UL) provides fast-moving consumer goods in Asia, Africa, Europe, and the Americas. The company has raised dividends for 49 years in a row. Over the past decade, the company has managed to boost distributions by 9.90% per year, handily beating the 2.40% annual inflation rate during this period.Yield: 3.70% (analysis)

McDonald’s Corporation (MCD), together with its subsidiaries, operates as a foodservice retailer worldwide. The company has raised dividends for 35 years in a row. Over the past decade, the company has managed to boost distributions by 27.40% per year, handily beating the 2.40% annual inflation rate during this period.Yield: 2.80% (analysis)

1 comment:

Great selections of strong brand name with strong economic moat. I do think these stocks are no brainers which means sure to go up in price because they are able to adjust their prices to keep up with inflation. By adjusting prices to keep up with inflation, I think these companies will surely make their numbers. I actually also like Mastercard (MA) and Visa.

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